By Christian Berthelsen and Justin Baer
Morgan Stanley is nearing a deal to sell its oil-trading and
storage business, potentially bringing to a close the bank's
lengthy effort to jettison the unit.
Trading firm Castleton Commodities International LLC has emerged
as the leading bidder and is offering more than $1 billion for the
business, according to people familiar with the situation.
Castleton's backers include hedge-fund heavyweights Glenn Dubin and
Paul Tudor Jones.
Morgan Stanley and Castleton are still in discussions, and any
deal--if one is struck--is still weeks away. The New York bank has
attempted twice before to unload the business, first in 2012, when
it couldn't agree on terms with Qatar's sovereign-wealth fund, and
then in 2014, when an agreement with Russian oil company Rosneft
OAO unraveled amid tensions over Moscow's intervention in
Ukraine.
Wall Street banks are shedding their physical-commodity
operations amid a slump in raw-materials prices and pressure from
regulators and politicians. The Federal Reserve has expressed
concerns that the dangers associated with producing and
transporting commodities pose a systemic risk to the financial
system.
Officials say incidents such as the BP PLC Deepwater Horizon
explosion in the Gulf of Mexico could saddle banks active in the
sector with destabilizing liabilities.
Taking the place of big banks are privately held
commodity-trading firms that operate across borders and face less
regulatory scrutiny and lighter disclosure requirements. A sale to
Castleton would reinforce this trend.
Morgan Stanley Chief Executive James Gorman has told the bank's
board that selling the oil business remains a priority for 2015,
people familiar with the matter said.
The deal is an important part of his strategy to shrink the
portion of the firm's balance sheet tied to debt, currency and
commodities trading to less than $180 billion by year-end.
The issue has been a key focus during quarterly earnings
conference calls with analysts. Morgan Stanley reports
first-quarter results Monday.
The bank has remained active in physical commodities trading
during the sale process. This year, the bank has leased almost two
dozen tankers to haul more than a million barrels of refined-fuel
products around the world, with the U.S. Gulf Coast and Atlantic
Coast frequent destinations, according to records available from
data provider Reuters.
Morgan Stanley also has been supplying gasoline-blending
components to Northeastern U.S. facilities operated by Sunoco
Logistics Partners LP, Exxon Mobil Corp. and Motiva Enterprises
LLC, a joint venture of Royal Dutch Shell PLC and Saudi Aramco,
Saudi Arabia's state oil company.
Castleton, based in Stamford, Conn., evolved from a spinoff of
Louis Dreyfus Commodities Group's energy-trading business several
years ago.
Its owners include Mr. Dubin, a co-founder of $30 billion asset
manager Highbridge Capital Management, which was later sold to J.P.
Morgan Chase & Co., and Mr. Jones, founder of Tudor Investment
Corp. Castleton's chief executive is William C. Reed II, onetime
head of power trading at Enron Corp.
Castleton's bid topped that of the other contenders for Morgan
Stanley's unit, including Australian bank Macquarie Group Ltd. and
private-equity giant KKR Inc., according to people familiar with
the talks.
Castleton and KKR had previously submitted a joint bid for J.P.
Morgan's physical-commodity assets when they were on the block in
2013. That business was ultimately sold to Swiss trading house
Mercuria Energy Trading Inc. Castleton and KKR bid separately this
time.
J.P. Morgan sold its physical-commodities business last year,
and Goldman Sachs Group Inc. divested a chain of metals warehouses
in December. The Fed is preparing tighter restrictions on banks
that trade commodities.
The value of physical assets would constitute much of the sale
price. Those assets include barrels of oil and fuel, leases for
pipeline capacity and storage terminals, supply and marketing
agreements with oil companies and a 49% stake in a company that
operates pools of tanker ships, Heidmar Holdings LLC. Those values
could fluctuate in line with market prices.
The bank had $1.6 billion in tradable assets such as crude oil
at the end of 2014, according to its most recent holding report
filed with the Fed.
The other part of the price would be a premium, or the value
assigned to the trading franchise Morgan Stanley has established in
the oil market. The bank has been seeking premiums in the range of
$300 million to $400 million, but the offers have come in the $200
million-to-$300 million range, according to people familiar with
the talks.
Write to Christian Berthelsen at christian.berthelsen@wsj.com
and Justin Baer at justin.baer@wsj.com
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